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The policy brief, called 'The Scramble for Europe', will be published by the European Council on Foreign Relations in July and claims that a lack of European cohesion has invited China to deal bilaterally with individual member states to exploit their divisions.
It states that China deliberately purchases the bonds of individual member states rather than Eurobonds, because "it knows that dealing bilaterally with European nations leads to a better pay-off than bolstering multinational initiatives".
This will pay political dividends in the future, according to report. It claims: "Even after 2014 – when majority decisions at the European Council will require 15 member states with 65% of the population – it will be useful for the Chinese to have a kind of 'China lobby' consisting of smaller member states. China could always depend some of them – particularly Malta, Cyprus and Greece – to block any unanimous decision against its interests."
It says that China's use of third-party intermediaries on the financial markets is compounded by Europe's own incompetence at accounting for foreign purchases of European public debt, claiming: "Europe's only way to verify it [foreign bond ownership] remains a great guessing game."
The authors recommend that Europe should have a unified statistical system for foreign buyers of public debt or co-ordinated member states' systems using similar accounting standards, like the Japanese and the US.
Offshore centres used by Chinese to launch investments
The report says that precise figures for direct investment into Europe are also opaque because four-fifths of China's external capital flows take place through offshore centres such as Hong Kong and the Cayman and Virgin Islands.
The think-tank claims that more than half of the total investment in Europe from China since early 2008 – $64 billion (€44 billion) – has taken place since October 2010. This figure will inevitably grow as Chinese overall direct investment is set to triple to $1 trillion by 2020.
The report finds that 2011 Chinese investments such as Sinopec's purchase of Spanish company Repsol's $7.1 billion Brazilian holdings "show that the Chinese government has now given the green light to major takeovers in Europe".
"There is no question that China's state led economy will have no qualms about keeping European divided if they are already fragmented by their political and economic interests," the report says, recommending that Europe manages its trade investment to ensure that reciprocal rights for investment are obtained from the Chinese.
Chinese diplomats seek 'shopping lists of infrastructure projects'
The third way in which China is increasing its presence is through the open European market for public procurement, the authors claim, saying: "Talks with European diplomats reveal that China's high-level trade delegations are asking for a shopping list of infrastructure projects that their companies can bid on."
The report recommends that the current European public procurement terms "sometimes amount to price dumping" and recommends: "Mixing Chinese soft loans with European public subsidies should be conditioned by proof that the Chinese terms proceed from fair competition."